by TJ Navarro
Constellation is an IMA Member
What do you think of when you hear the word “risk”? If you’re like most people, chances are, you may think about the potential for an undesirable outcome to occur. The reality is, taking on risk or uncertainty can lead to either positive or negative outcomes. According to the The Economic Times, ‘Risk implies future uncertainty about deviation from expected earnings or expected outcome.’ As a consumer, risk can be acceptable at times, and may be worth taking on, depending on the situation and your tolerance to withstand potential changes or unknown outcomes.
As a quick note before we begin talking about risk and how it relates to retail energy options, a competitive energy market puts the power of choice in consumers’ hands, enabling them to choose the right energy solution to meet their specific needs. Competitive or open markets also motivate suppliers to offer creative energy products that provide businesses with an array of choices and the ability to match their unique needs with solutions or strategies they feel best align with their business needs and risk tolerance.
In the past few years, we’ve seen some businesses taking on increased risk in their supply contracts — choosing to sign up for a lower price in exchange for taking on more risk. We’ve heard from customers who switched to other supplier products or contracts, only to be disappointed with the outcome and the price on their bills. That’s why we suggest that customers carefully assess each product and contract they’re considering, to fully understand which risks are taken on by the supplier and which are shifted onto the customer. By having this detailed discussion, customers can ensure that when they’re comparing supplier offers, they choose the one that best fits their budget and their risk tolerance. Remember, the more risk a supplier can place on a customer, the lower the price they’ll be able to offer. Here are a few things to consider when evaluating potential supplier offers:
- Undue Risk – Does the contract expose you to unnecessary risk?
- Unknown Risk – Is the contract clear or are there gray areas you need to delve into further?
- Up Front about Risk – If the terms of the contract are direct and explain where a customer may be exposed to risk or price-adjustment(s), how do these align with your business needs and/or risk tolerance?
If you’re looking for a fixed price solution, these considerations are especially important. Many customers buying a fixed price solution do not have an appetite for budgetary uncertainty, which makes understanding the details of a supply contract critical in avoiding potential surprises or unexpected changes in costs. By failing to closely review the terms of a contract, customers can be unaware that they are accepting additional risk. Not all supplier products and contracts are created equal which makes their differences an important part of evaluating one offer versus another, and why comparing offers on the basis of price alone can lead to undesired outcomes. We offer resources to help businesses make informed decisions and encourage customers to ask questions anytime there’s something they’re uncertain about. In a previous post, ‘How to Read Your Energy Contract Like a Professional’ we offer some tips including examples of questions to ask when reviewing contract options.
As mentioned in the introduction, risk isn’t necessarily a negative concept in your energy contract as long as you are aware of the risk you are taking and understand the options you have to control that risk. As a supplier that knows that not all customers view risk the same way or have the same tolerance for budgetary uncertainty, Constellation offers an array of solutions to meet each of our customer’s individual needs.
For customers who do have some tolerance for risk, taking on certain risks in their energy supply contract can be beneficial. One example of this is a customer who can control their load and has the ability to curtail during peak events to reduce their capacity or transmission obligations. Another example is a customer who knows they are completing an energy efficiency project during the term of their contract that is going to improve their overall load profile. In both examples the customers could see a reduction in cost by entering into a contract where they wear risk by passing through or allowing for a price-adjust option of their capacity and/or transmission costs. (Note: For “price-adjust” terms it’s important to understand if a supplier is providing a two-sided price-adjustment or a one-sided price adjustment, as customers with reductions to costs will only see these reductions passed through if a supplier is offering a two-sided adjustment.)
One of the solutions we offer at Constellation is a unique product that gives customers the value of a fixed price contract, while allowing customers to reduce costs if they’re able to decrease usage during peak events. Our Peak Response solution allows a customer to lock in a fixed price and set the ceiling on their energy cost. At the same time, during the term of the contract, if the customer takes actions to reduce their load during zonal peak periods, therefore reducing their capacity obligation, Constellation will credit that reduction back to the customer.
To view the original article, click here.